Armen A. Alchian

Emeritus Professor

Department of Economics

UCLA

Armen Alchian was born on April 12, 1914 in
Fresno, California. In 1932 he attended Fresno
State College, and transferred to Stanford
in 1934. He obtained his B.A. from Stanford
in 1936. He continued at Stanford as a
graduate student, finishing his Ph.D. dissertation
on "The Effects of Changes in the
General Wage Structure" in 1943. In
1940-41 he was at the NBER and Harvard, and
in
1942 he was an instructor at the University
of Oregon. He served in the U.S. Army Air
Forces from 1942-46 doing statistical work.
He arrived at UCLA in 1946, becoming
associated with RAND at the same time. He
became a full professor at UCLA in 1958.
He as
received numerous awards and honors over
the years, and became a Distinguished Fellow
of
the American Economic Association in 1996.

Armen Alchian is known to his students and
colleagues and others as the founder of the
"UCLA tradition" in economics,
a tradition that continues to this day. This
tradition emphasizes that individual behavior
is self-seeking and "rational"
and
that this has many unanticipated consequences.
It recognizes that "rationality"
is the outcome of evolution and learning,
and emphasizes the frictions such as uncertainty
that act as brakes on individual's ability
to make decisions and coordinate with one
another.

Above all, Alchian is known for the impact
he has had on generations of UCLA graduate
students, largely through his first year
course in microeconomics. His best known
student
is William F. Sharpe, who received the Nobel
Memorial Prize in Economic Science in 1990
for his work on finance.

Armen is an avid golfer. He is an equally
avid computer user; among his other
accomplishments he was the first member of
the UCLA Economics Department to have a PC
in
his office, and was an early adopter of such
important innovations as email.

Alchian has not been a prolific writer, but
has rather contributed articles of major
significance. Here is a review of some of
his most significant contributions.

Evolution and learning

A constant theme in Alchian's work is the
rational self-seeking view of economic man.
Armen, however, was far ahead of his time
in seeing individual rationality as a
consequence rather than as an assumption.
This evolutionary point was clearly laid
out in
1950: he argued that regardless of the
underlying motivations, efficient behaviors
survive, and inefficient behavior does
not. Learning and uncertainty is a constant
theme
of Armen's work throughout his career;
of particular interest is his empirical work
on the
learning curve from the early 1960's in
which he studies how the output of airframes
increases over time with the same level
of input.

Alchian is one of the founding fathers of
the "law and economics" school,
and
in particular what has come to be known
as the property rights approach. This approach
emphasizes the implications of property
rights for risk bearing and incentive reasons,
and
the inefficiencies that can result from
common ownership.

"Some Economics of Property Rights,"
Il Politico, 30 (1965):
816-829.

Transactions costs and the theory of organizations

Alchian's interest in law and economics and
property rights led him in a natural way
to
investigate the operation of the firm and
other organizations. In the early 1970's
he and
Harold Demsetz published a landmark paper
on the theory of the firm. This emphasized
the
way in which the firm can internalize externalities
associated with incentive problems.
The difficulties of monitoring in the presence
of shirking were emphasized, and the
article represents the beginning of the
modern literature on incentive contracts
and moral
hazard. Alchian's work on the theory of
organizations continued into the late 1970's
as
his work with Robert Crawford and Benjamin
Klein studied the way in which specific
investment creates hold up problems that
can be solved in part by vertical integration
among business units.

"Vertical Integration, Appropriable
Rents, and the Competitive Contracting
Process,"
(with Robert Crawford and Bejamin Klein),
Journal of Law and Economics (1978)

Information costs and resource unemployment

Alchian was also a pioneer of the idea that
information costs can lead to resource
unemployment, especially of labor. Typical
of Armen, his work on the subject was kept
"in the drawer" for many years
and used largely in his graduate teaching,
until
colleagues urged him to publish. In addition
to the basic idea of unemployed resources
searching for more productive uses, Armen
emphasized the role of middlemen in the
facilitation of resource employment. This
paper represents one of beginnings of a large
literature on search and employment that
continues to this day.

Alchian has also had a lifetime fascination
with the role of money as a facilitator of
trade. Closely connected to his work on
information costs and resource unemployment,
he
has emphasized how the use of money in
conjunction with middlemen serves to lower
the
costs of conducting trade.

Alchian is also widely known as the author
(with Wiliam Allen) of the first year
undergraduate textbook Exchange and Production which has appeared in numerous
editions since 1964. This book, familiar
to many generations of undergraduates and
graduate students alike, is unique. Unlike
most elementary undergraduate texts, which
are
excessively bland, Exchange and Production is bitingly ironic, poking fun at
political correctness, long before it had
a name. It is unique as well in that it
incorporated the Alchian and Allen's latest
thinking about issues such as property rights
and unemployment when most other textbooks
are content to regurgitate the state of
economic theory of some 20 years ago.